Qualcomm forecasts show dependence on China’s rollout of LTE

Qualcomm Inc.’s effort to step up growth in China is hitting a speed bump.

The shares of the world’s largest mobile phone-chip maker dropped 3.5 percent Thursday after it forecast third-quarter profit and revenue that may fall short of some analysts’ estimates, citing weaker phone sales in China as the rollout of a fast new data network takes longer than Qualcomm (Nasdaq: QCO) expected.

Consumers are buying fewer phones based on older technology as they wait for the introduction of the long-term evolution network, Chief Executive Officer Steve Mollenkopf said. That’s curbing chip-license revenue for San Diego-based Qualcomm, which is counting on the speedy service to jump-start growth.

“The launch of LTE in China is very important to Qualcomm, and it’s difficult to predict,” Mollenkopf said. Demand for the company’s chips indicates that adoption of the service will accelerate toward the end of 2014, he said.

Qualcomm shares fell to $77.87 at the close. The stock has gained 4.9 percent this year.

Revenue in the three months ending in June will be $6.2 billion to $6.8 billion, the company said yesterday in a statement. That compares with an average analyst estimate of $6.6 billion, according to data compiled by Bloomberg. Profit will be $1.15 to $1.25 a share, compared with an average projection of $1.25.

“The company’s guidance is becoming harder to achieve given the apparent delays in the rollout of LTE in China,” said Bill Kreher, an analyst at Edward Jones & Co. in St. Louis. He recommends buying the stock, as do 80 percent of analysts who cover the company, according to data compiled by Bloomberg. “In the near term, results may be choppy.”

While the company is counting on smartphone sales in China to fuel growth, it has faced challenges in doing business there. In a filing yesterday, Qualcomm said it received a Wells notice from the U.S. Securities and Exchange Commission last month that the agency recommended enforcement action related to bribery allegations in China.

Qualcomm said it first became aware of the investigation in 2012 and started its own inquiry. The company discovered that it had provided employment considerations, gifts and other benefits to “individuals associated with Chinese state-owned companies or agencies,” according to the filing. The total value of the gifts was less than $250,000, Qualcomm said, and it’s cooperating with inquiries at the SEC and the U.S. Department of Justice.

“The Wells notice is a reflection of the regional staff’s preliminary recommendation,” said Don Rosenberg, Qualcomm’s general counsel, on a conference call. “We’ve responded with what we think are good arguments as to why we think there isn’t a violation.”

In November, the company disclosed that China’s National Development and Reform Commission had begun an investigation related to an anti-monopoly law. Mollenkopf said that hasn’t reduced demand in China for Qualcomm’s chips and the company has struggled to keep up with orders.

Second-quarter net income rose to $1.96 billion, or $1.14 a share, from $1.87 billion, or $1.06 a share, the company said. Sales in the period that ended March 30 rose 4 percent to $6.37 billion, the slowest increase since 2010. Analysts on average had predicted earnings of $1.05 a share on revenue of $6.48 billion.

Chip royalties

Qualcomm benefits from the sale of handsets even when they don’t use its chips. The company’s ownership of code-division multiple-access technology, or CDMA, allows it to charge royalties on most phones connected to modern data networks.

As a greater number of phone-service subscribers in emerging markets shift from call-only handsets to more expensive devices that surf the Internet, the number of people using Qualcomm’s technology is increasing. Licensing provides the company with the majority of its profit, while sales of modems and processors contribute the largest portion of its revenue.

China Mobile Ltd., which has more subscribers than the U.S. has people, has said it will have 100 million LTE customers by the end of the year. That’s new territory for Qualcomm, after the wireless carrier -- the world’s largest -- went with a technology for its existing third-generation network that largely excluded the U.S. chipmaker’s technology.

“It might be ugly for another quarter or two, but China Mobile will make it happen one way or another,” said Alex Gauna, an analyst at JMP Securities LLC in San Francisco, who rates the shares the equivalent of a buy. “We are depending on China, and China can be difficult to predict.”

The shares of Xilinx Inc. (Nasdaq: XLNX), which makes chips used in mobile-phone network base stations, fell 9.1 percent, their biggest one-day decline since 2005. On Wednesday the company projected sales that may fall short of some analysts’ estimates in the current period. Hans Mosesmann of Raymond James & Associates and other analysts cited the slower rollout of LTE in China as a possible reason for the forecast.

June 12, 2013 -- Reporter Tierney Plumb speaks with Tim McDonough, vice president of marketing for Qualcomm CDMA Technologies, about the latest technologies at the E3 Expo at the Los Angeles Convention Center on Wednesday.